FHA Is At It Again

In what may seem like a repeat of old news, FHA has again increased the cost of their mortgage insurance.  Beginning with new FHA case numbers assigned on or after April 18^th, 2011, the rate of the annual insurance premium has increased by 25 basis points.  Depending upon the loan’s term and the amount of down payment, the new rate of insurance is as follows:

If the term of the loan is 30 years…

            …and the down payment is <5%, the annual premium is 1.15%

            …and the down payment is ≥5%, the annual premium is 1.10%

If the term of the loan is 15 years…

            …and the down payment is <10%, the annual premium is 0.50%

            …and the down payment is ≥10%, the annual premium is 0.25%

The amount of the monthly mortgage insurance payment is calculated by multiplying the annual premium by the base loan amount (base loan amount equals sales price less down payment), and then dividing by 12.

According to HUD, these changes are being made in response to a need to strengthen the capital position of the Mutual Mortgage Insurance Fund (MMIF) and are projected to generate an additional $2.5 - $3 billion annually. This is the second increase in the monthly insurance premium rates since October, 2010 and has now doubled the rate that was being charged prior to October of last year.  Obviously, this raises the monthly expense of financing a home with FHA, and a natural outcome will be the transition to alternate financing sources that have a lower cost of ownership.

It’s no secret that HUD would like to reduce the public’s reliance upon FHA financing, and by increasing the mortgage insurance rate they will begin funneling homebuyers towards competing loan programs.  Another discussion point in Washington is to increase the down payment on FHA loans from 3.5% to 10%.  While this doesn’t appear to be happening anytime soon, it’s another sign that the government wants to have a much smaller slice of the home financing pie.

Comments

[FHA Rates]

Ever since the conventional mortgage market ran into financial trouble, FHA mortgage loans have been increasing as a more viable source of home financing because of the easier mortgage qualifying guidelines and relatively lower costs. The market share for FHA loans has jumped from a 3% share to about 30% of home purchase financing plus about 20% of home refinance loans.